Drought-hit Australia culls cattle, clouds beef-supply outlook

A drought in Australia has forced ranchers in the world's third-biggest beef exporter to cull cows, stoking fears of a global beef shortage in coming years with the U.S. herd at its lowest in six decades.

The slaughter of animals and effect of the drought could boost beef supply in the short term, but spells longer term shortages due to the reduced breeding stock.

"The big problem that we are going to have in the next 12 to 18 months is that progeny that would have been born today won't be there," said Brad James, Rabobank's manager for the Northern Territory and the key beef producing state of Queensland, which is home to around half the country's 28 million head of cattle.

"Drought affected cows can't calve."

The shortfall for a country that accounts for almost a fifth of the global trade in beef could drive up prices at a time when demand is rising in many emerging countries, where increasingly affluent middle classes are developing a taste for high-protein western diets and fast-food like hamburgers.

Analysts see Australian cattle prices climbing by up to about 50 percent this year. If they are right, that would further fuel Chicago live cattle futures already hitting record highs.

Queensland has recorded less than half of the normal rainfall in the last three months, draining water reserves and stunting grass growth in pastures double the size of France. It is the second straight year the state has suffered poor rains.

For the week ending Jan. 24, cattle slaughter in Australia rose 40 percent year on year to reach a record high of 161,712 head, according to industry data firm National Livestock Reporting Service.

Last month, industry body Meat and Livestock Australia (MLA) projected cattle numbers would drop to 27.25 million head by July - the end of the 2013/14 marketing year - but warned that fall could be steeper if the drought persists.

Heavy rains from Cyclone Dylan provided a brief respite last week, but the Australian Bureau of Meteorology forecasts a return to dry weather for Queensland, with less than 10 millimetres of rain expected this week.

"We need weeks and weeks of good rains if we are to turn things around in Australia," said Simon Quilty, meat and cattle analyst at FCStone Australia.

Distress sales by ranchers dragged prices to their lowest in more than three years, with Australia's benchmark Eastern Young Cattle Indicator (EYCI) falling to A$2.78-1/2 kg on Jan. 22.

But analysts expect prices to rebound once concern over the future dearth of cows registers with the market, especially as some will look to restock parts of their herds when the drought eventually breaks. Luke Mathews, commodities strategist at Commonwealth Bank of Australia, said the EYCI could rise "well above" A$4 a kg by the end of 2014.

Concerns over the outlook for Australian beef supplies come at a time when the U.S. cattle herd has dropped to its smallest in over 60 years as the global livestock industry grapples with a decline in feed grain production that pushed corn and soybean prices to all-time highs in 2012.

The recent bitter cold across the U.S. Midwest has slowed cattle weight gains and delayed movement of livestock, pushing prices to record peaks in January, though ranchers in California have been selling more cattle, because of dry weather.

LOOKING ELSEWHERE

Higher beef prices are likely to persuade some consumers to switch to other meats.

"We could see higher demand for chicken and pork," said a Hong Kong-based livestock analyst.

Beef importing nations will also seek to diversify sources of supply.

China's beef imports quadrupled in 2013 to 400,000 tonnes, according to the U.S. Department of Agriculture, with the MLA saying around 150,000 tonnes was supplied by Australia.

After Japan and the United States, China is Australia's third largest customer, but it is seeking other suppliers to meet its surging demand.

"It's very likely that China will open the market to the U.S. and Brazil this year," said Pan Chenjun, senior analyst at Rabobank in Beijing.

China barred imports of beef from the United States in 2003 and Brazil in 2012, after the discovery of mad cow disease in animals from those countries.